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Do preference reversals generalise? Results on ambiguity and loss aversion

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  • Ball, Linden J.
  • Bardsley, Nicholas
  • Ormerod, Tom

Abstract

Preference reversals are frequently observed in the lab, but almost all designs use completely transparent prospects, which are rarely features of decision making elsewhere. This raises questions of external validity. We test the robustness of the phenomenon to gambles that incorporate realistic ambiguity in both payoffs and probabilities. In addition, we test a recent explanation of preference reversals by loss aversion, which would also restrict the incidence of reversals outside the lab. According to this account, reversals occur largely because the valuation task endows subject with a gamble, activating loss aversion. This contrasts with the choice task, where the reference point is pre-experiment wealth. We test this explanation by holding the reference point constant. Our evidence suggests that reversals are only slightly diminished with ambiguity. We find no evidence supporting their explanation by loss aversion.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Psychology.

Volume (Year): 33 (2012)
Issue (Month): 1 ()
Pages: 48-57

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Handle: RePEc:eee:joepsy:v:33:y:2012:i:1:p:48-57

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Web page: http://www.elsevier.com/locate/joep

Related research

Keywords: Preference reversals; External validity; Ambiguity; Loss aversion;

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  13. Ulrich Schmidt & Chris Starmer & Robert Sugden, 2008. "Third-generation prospect theory," Journal of Risk and Uncertainty, Springer, vol. 36(3), pages 203-223, June.
  14. Seidl, Christian, 2002. " Preference Reversal," Journal of Economic Surveys, Wiley Blackwell, vol. 16(5), pages 621-55, December.
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